Oceaneering International, Inc.

Good morning. My name is Julia, and I will be your conference operator. I would like to welcome everyone to the Oceaneering second quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. With that, I will now turn the call over to Mr. Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. You may begin.

Thank you, Julie. Good morning, and welcome to Ocean Airing's second quarter 2021 results conference call. Today's call is being webcast, and a replay will be available on Ocean Airing's website. Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments, and Alan Curtis, Senior Vice President and Chief Financial Officer. Before we begin, I would just like to remind participants that statements we make during the course of this call regarding our future financial performance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our second quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Thanks, Mark. Good morning, everybody, and thanks for joining the call today. We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021. These results reflect a marked sequential increase in activity as four out of five of our operating segments delivered a revenue increase on average of more than 19%. As announced yesterday, we are raising our EBITDA guidance range to $200 to $225 million for 2021. And to avoid any doubt or confusion, we are not changing our free cash flow guidance. The confidence in increasing our guidance range stems from our strong first half 2021 financial performance The increase in demand, energy demand, is a result of the increasing number of COVID vaccinations, allowing for an easing of restrictions. The OPEC Plus production discipline yielding supportive commodity prices and the positive trend in the global economic recovery. Confidence is returning to the energy services industry and especially to those companies that can help their customers with carbon reduction goals. This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses, underpin our general expectation for increased activity levels over the next several years. Now, I'll focus my comments on our performance for the second quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2021, and Oceaneering's improved consolidated 2021 outlook, including a higher adjusted EVA guidance range, continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position. After these comments, I will then make some closing remarks before opening the call to your questions. now to our second quarter summary results we were very pleased with our adjusted operating results for the quarter we generated adjusted earnings before interest taxes depreciation and amortization or adjusted evita of 60.6 million dollars exceeding consensus estimates During the second quarter, we generated $50.5 million in cash from operating activities and used $12.6 million for maintenance and growth at capital expenditures, resulting in free cash flow generation of $37.9 million. In addition, during the quarter, we retired $30.5 million of our 2024 senior notes through open market repurchases. In total, our cash position increased by $13.3 million, resulting in a cash balance of $456 million at the end of the second quarter. Liquidity remains strong with no borrowings against our $500 million revolving credit facility and no loan maturities until November of 2024. The positive operating results were attributable to a seasonally influenced 14% sequential growth in revenue, complemented by continued operating discipline and incremental efficiency gains. As expected compared to the first quarter of 2021, our energy segments in aggregate posted double-digit revenue growth and improved adjusted operating results in the second quarter. Our aerospace and defense technologies, our ad tech segment, delivered sequential growth and solid adjusted operating results. sequentially consolidated adjusted operating results increased by 9.1 million dollars with all of our operating segments generating positive adjusted operating results and evita now let's look at our business operations by segment for the second quarter of 2021 subsea robotics or ssr adjusted operating income improved on nearly 20 percent higher revenue Our SSR quarterly adjusted EBITDA margin of 31% was consistent with recent quarters as pricing remained stable. Operating activity in our SSR segment resulted in sequentially higher ROV days and related tooling activity and higher survey activity. The SSR revenue split was 80% from our remotely operated vehicles or ROV business and 20% from our combined tooling and survey businesses compared to the 78-22 split, respectively, in the immediate prior quarter. As we had forecast, sequential ROV days on hire increased on standard seasonality and recovering offshore activity. With an increase in days for both drill support and vessel-based services, days on hire were 14,005 as compared to 11,887 during the first quarter. Our fleet use was 58% in drill support and 42% in vessel-based services versus 64% and 36% respectively in the first quarter. We maintained our fleet count at 250 ROV systems, and our second quarter fleet utilization was 62%, up significantly from 53% in the first quarter. During the second quarter, we retired five of our conventional work-class ROV systems and replaced them with three upgraded conventional work-class systems and two ISRIS work-class ROV systems that are currently engaged in renewables work. Average ROV revenue per day on hire of $8,056 was 2% higher than average ROV revenue per day on hire of $7,874 achieved during the first quarter. At the end of June, we had ROV contracts on 73 of the 126 floating rigs under contract, or 58% market share. which was flat with the quarter ending March 31, 2021, when we had ROV contracts on 78 of the 135 floating rigs under contract. Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%. Turning to manufactured products, sequentially, our second quarter 2021 adjusted operating income declined on lower segment revenues. Adjusted operating income margin decreased to 1% in the second quarter from 4% in the first quarter of 2021 as lower revenue decreased the ability to leverage our cost base. Activity in our mobility solutions or non-energy business remained muted during the second quarter of 2021. Our manufactured products backlog on June 30th, 2021 was $315 million, improving on our first quarter backlog of $248 million. Our book-to-bill ratio was 1.3 for the six months ended June 30, 2021, and was 0.8 for the trailing 12 months. Offshore projects group, or OPG, second quarter 2021 adjusted operating income declined as compared to the first quarter of 2021, despite a meaningful increase in revenue. Revenue benefited from ongoing field activities in several projects in Angola and a seasonal increase in intervention, maintenance, and repair, or IMR, work in the Gulf of Mexico. The sequential decline in adjusted operating income margin from 10% in the first quarter of 2021 to 7% in the second quarter of 2021 was primarily due to unplanned downtime and related costs associated with the Angola riserless light well intervention project, which was partially offset by higher IMR activities in the Gulf of Mexico. Integrity Management and Digital Solutions, or IMDS, sequential adjusted operating income was higher on a 19% increase in revenues. Higher seasonal activity and the startup of several new multi-year projects contributed to the revenue increase. Continuing efficiency improvements, including utilization of field personnel, resulted in an adjusted operating income margin increasing to 7% in the second quarter of 2021 from 5% in the first quarter of 2021. Our ADTEC second quarter 2021 adjusted operating income improved from the first quarter of 2021 on a 20% increase in revenues. Adjusted operating income margin of 18% was better than forecast due to project mix and favorable rate-based adjustments. Adjusted unallocated expenses of $30.3 million was slightly lower sequentially due to lower expense accruals related to incentive-based compensation forfeitures. Now I'll address our outlook for the third quarter of 2021. We are projecting a decline in our consolidated adjusted operating results on moderately lower revenues, with adjusted EBIT on the range of $50 million to $55 million. We expect commodity prices to support good activity levels in our energy segments, particularly for short cycle work. For the third quarter of 2021, as compared to the second quarter, we expect relatively flat adjusted operating profitability in our energy segments to be more than offset by lower ad tech adjusted operating results and higher unallocated expenses. For our third quarter 2021 operations by segment as compared to the second quarter of 2021, For SSR, we are projecting relatively flat activity and adjusted operating profitability in our ROV, survey, and tooling businesses with similar ROV utilization as compared to the second quarter. SSR adjusted EBITDA margin is anticipated to remain consistent with the prior several quarters. For manufactured products, we anticipate relatively flat revenue and adjusted operating profitability. Board activity continues to look encouraging in our energy products businesses. However, activity continues to lag in our mobility solutions businesses. For OPG, we forecast lower revenue and relatively flat adjusted operating results. We expect Gulf of Mexico IMR activity to remain at a relatively high seasonal level through the third quarter. The rise of the slight well intervention project and field support contract in Angola are expected to continue for a portion of the third quarter. Our expectation for relatively flat adjusted operating results takes into account the above-described levels of activity and improved uptime as compared to the second quarter. For IMDS, we expect both revenue and adjusted operating results to remain relatively consistent with the second quarter of 2021. For ad tech, we forecast lower revenue and lower adjusted operating results due to a change in project mix as compared to the second quarter. Unallocated expenses are expected to be in the mid-$30 million range due primarily to increased information technology infrastructure costs and normalized accruals for incentive-based compensation. Directionally, for our full-year 2021 operations by segment as compared to 2020, for SSR, we expect adjusted operating results to improve on slightly higher revenue. ROVDAs on higher are projected to remain relatively flat year-over-year with minor shifts in geographic mix. Results for tooling-based services are expected to be flat, with activity level generally following ROV days on higher. Survey results are expected to improve on growing international activity. SSR forecasted adjusted EBITDA margin is expected to remain relatively consistent with what we achieved in 2020. For ROVs, we expect our 2021 service mix to remain about the same as the 2020 mix of 62% drill support and 38% vessel-based services, with higher vessel-based percentages during the seasonally higher second and third quarters. We estimate overall ROV fleet utilization to be in the mid to high 50% range, again with higher seasonal activity during the second and third quarters. We continue to forecast that our market share for the drill support market will remain around 60% for the foreseeable future. As of June 30, 2021, there were approximately 28 Oceania ROVs on board 37 drilling rigs with contract terms expiring by year end. During the same period, we expect 33 of our ROVs on 40 floating rigs to begin new contracts. For manufactured products, we forecast lower operating results due to the long cycle nature of this business and reduced customer capital commitments during 2020. Operating results in 2020 benefited from contracts awarded in 2019 that allowed for beneficial cost absorption through the year. In 2021, we expected the improved order intake seen during the first half of the year will drive increased activity in the fourth quarter. Our non-energy mobility solutions businesses continue to see reduced activity and order intake. However, confidence is building that we will see order intake improvement in 2022. We forecast that our operating income margins will be in the low to mid single-digit range for the year, and the segment book-to-bill ratio will be in the range of 1.1 to 1.5 for the full year. For OPG, we forecast a meaningful annual improvement in adjusted operating results on higher revenue. Good vessel utilization is expected to continue through the third quarter with operators remaining active with IMR work in the Gulf of Mexico. However, we also expected a typical seasonal decline in activity during the fourth quarter. Our expectations for utilization are driven by the commodity price environment, which remains supportive to short-cycle call-out work, which is the majority of the work performed in this segment. Utilization of our vessels, both owned and chartered, has improved to the point that may lead us to entry into spot charters on an as-needed basis this year. For IMDS, we forecast improved operating results on higher revenue. We expect second half 2021 revenue to continue to benefit from incremental multi-year contracts that began during the first half of 2021. We forecast that our adjusted operating income margin will continue to improve through the end of the year as we continue to drive more efficiency in this business. Adjusted operating margins are expected to average in the high single-digit range for the year. For ad tech, we expect improved adjusted operating results on increased revenue with an annual adjusted operating margin approximately the same as that achieved in 2020. We continue to see good growth opportunities in all three of our primary ad tech business lines, defense, subsea technologies, vessel modification and repair services, and space systems. Our estimated organic capital expenditure total for 2021 remains between 50 and $70 million. This includes approximately 35 to $40 million of maintenance capital expenditures and 15 to $30 million of growth capital expenditures. We forecast our 2021 income tax payments to be in the range of 40 to $45 million. We continue to expect $28 million in CARES Act tax refunds. However, the timing of receipt of these payments, whether in 2021 or 2022, is uncertain. Unallocated expenses are expected to average in the mid $30 million range per quarter for the second half of 2021. Now, turning to our balance sheet. Our net debt position improved during the second quarter as we repurchased $30.5 million of our 2024 senior notes and were able to build our cash balance by $13.3 million. We had $456 million of cash and cash equivalents at the end of the second quarter. We continue to expect free cash flow generated in 2021 will be in the excess of that generated in 2020. We are well positioned to address the maturity of our 2024 senior notes and will continue to be opportunistic and proactive as to how and when we will address the remainder of this pending maturity. And as a reminder, we continue to have our $500 million undrawn revolver available to us until November of 2021 and $450 million available until January 2023. In summary, Based on our first half financial performance and expectations for the second half of 2021, we are raising our adjusted EBITDA guidance to a range of $200 to $225 million for the full year. This confidence, despite ongoing uncertainties associated with COVID-19, stems from our strong first half 2021 performance, positive client interactions, supportive oil price expectations, and growing backlog. As stated in my opening remarks, confidence is returning to the energy services industry and especially to those companies that can help their customers with carbon reduction goals. This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses, underpin our general expectation for increased activity levels over the next several years. Our focus continues to be on generating positive free cash flow in 2021 retaining and attracting top talent, addressing our 2024 debt maturity, maintaining financial flexibility, and growing our businesses by leveraging our technologies and capabilities into new markets. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you might have.

As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ian McPherson. Ian McPherson Good morning, Rod.

Thanks for all the color, as always. Just like a high-level perspective, visibility for deepwater activity going into 2022, and I know it's too microscopic to look at your your seasonal rov utilization so you'll have more robotics activity seasonally in q2 and q3 but i would imagine that we have an uptrend in deep water recount visibility going into next year can you talk about hindering and um what types of uh discussions you're having with um with operators regarding their needs uh for for rovs and and into next year just generally, and what flavor of growth we might consider at this point for the market broadly?

Yeah, and it does feel good. I'll just say that. We can feel it, but it's not like somebody dropped the start flag. I will say that. It's a gradual increase. We can't necessarily see a huge spike in the number of floating drilling rigs, But I think the optimistic thing we see is that we're going through contract renewals. We're seeing longer contracts again. We're seeing people looking for the one in the two years deals where we were going well by well in the past. So I would say that that's kind of the tone is that, yes, it's optimistic. Yes, we see it going up. But it's going to be a ramp up. There's not going to be any big spikes.

okay that makes sense for now and it sounds like it's probably uh maybe biased to firm up from that as we go through the back half of the year and then uh i think i think every earnings call for every company in the world this this quarter is asked about how you're coping with inflation and supply chain gremlins i would think of that as being particularly relevant for ad tech uh but you seem to have a pretty sanguine outlook there so just want to talk about any potential storm clouds there or how you're addressing those issues and the margin profile of business structurally going forward.

Yeah, I think the steadiness of our contracts and the way that the ad tech work is contracted, that's actually pretty well insulated from a lot of those changes because it's been more predictable. I think where you're going to see it is as we start to contract new work, some of these new orders come in. Generally, we've been, again, well protected in the sense that we had back-to-backs with the large suppliers on the manufactured products and things like that. But But I think you're going to continue to see, just like everybody else, you know, this whole great resignation. We're all going to see pressure on labor costs, people costs. That's going to be something that we have to watch. And we have to kind of signal to our customers early. But, again, it's happening to everybody. So I don't think there's going to be a lot of pushback when they start to see that those costs go up. You know, the typical things, we're just watching them very carefully. Fuel and a lot of those things on the boats, most of that gets passed along as we go. So I don't see any big cliffs out there, but there is generally a rise, like you said. Cost of almost everything is going up slightly. So it's just a matter of making sure that we signal early to the customers and we build it into contracts.

That's great. Thanks, Rod. I'll pass it over. Hey, thanks, Ian.

Your next question comes from the line of Mike Sabella.

Hey, good morning, everyone. Good morning, Mike. So I don't think it's – I guess maybe it's a little early to start thinking about 2022. You know, you kind of commented a little bit on there. I was wondering if we could just kind of poke around in the CapEx budget next year. You know, as you sit here today, is there anything that you would flag that we should be aware of that could require capital next year? And as we think about CapEx over the medium term, you know, how should we be thinking about that? Is that a percentage of sales? And then, you know, is the CapEx budget that we're seeing this year, is that sustainable or is it, you know, do you think it kind of moves up from there?

I think you have to watch a few things, Mike, and it's a great question. As you expect it, it's hard to answer. But think about things like you saw the turnover in the ROV that we talked about in this meeting. We're upgrading ROVs. We're adding capability to the conventional ROVs, but we're also modifying some of them to work in the renewables market. Long may it continue. That's good stuff. It's related to contracts. It's related to the shift to renewables. So I think that's good. I also like investment in things like freedom, some of these changing market opportunities. Those are the growth capital that I expect we'll keep spending on. And then the thing that's harder to predict is do we have to pick up assets for a contract or something like that? I think those are going to be – if those kind of opportunities come, they're going to come with upside on revenue and upside on EBITDA. So I think probably if you said is it sustainable, not really if you're growing, but can you keep it – More like a percentage of revenue, like you said, if you're growing, I would say yes. I think you're kind of triangulating on it the right way.

Perfect. That's a very helpful answer. And then, you know, your leverage ratio is down to one and a half times. You know, you guys seem to be more confident that the 2024 maturity was under control than, you know, kind of any point in the past couple years for sure. Is there a target leverage that you all can share with us that you are looking for at this point in the cycle? And then as you get there, I know you mentioned some potential growth capex. Could you just talk about other capital allocation priorities that you could have next year? Yeah, Mike.

Yeah, I certainly think, you know, obviously the lower the leverage ratio, the more comfortable, you know, we are as a company. But I think it's getting that fine balance of, you know, being able to have some growth capex in our plan for next year. I mean, yes, Rod, you know, is it sustainable? You know, yes, if you're not growing. But I think, you know, it's looking for those niche technologies, looking for opportunities to find other ways we can grow into adjacent markets from where we are today and I think that's where we would probably spend a little more on the CapEx. I don't think it's going to be one that would change our overall leverage ratio significantly from where we're at today, though. So I think, you know, the 1.5 is certainly given our, you know, guidance for free cash flow this year and the expectations, you know, that you can start reading through into next year, you know, should be reasonably well there. So that would just point towards a potential lower leverage ratio.

Mike, I just add, you know, when we talk about the capital gains, The ROV fleet being fairly stable, if the drill support market is stable, that's that renewal and replacement that tends to go on. But on the good side, if you start to see other fleets that we would like to be operating, people movers, AGVs for hospitals and manufacturing plants, those would be the kinds of things that I would speak to as the good upside.

Yeah. And I think the other part of that leverage ratio we're always looking at is what is the runway? You know, when does the maturities really come due? You know, if they were due tomorrow, that would lead us to maybe a slightly different conclusion. But with, you know, the debt maturities into 24 and 28, you know, that gives us confidence we have the ability to deal with them. Yeah, thanks, all.

Thanks, Mike. Okay, next question. Your next question comes from the line of Taylor Zucker.

Hey, good morning and thanks for taking my question. Good to see the 2021 EBITDA guidance range move higher. I guess my question is for the back half of the year, it sounds like we've got some better visibility towards a healthy, seasonally adjusted level of activity for IMR work in the Gulf of Mexico. Just thinking about the high end and the low end of that range, could you just help frame for us what the primary sort of wild cards would be or drivers on getting to the high and low end of that range? Is it primarily the level of IMR activity you're seeing or that you will see, or are there some other factors that could play a role as well?

You got it. And remember, IMR runs through both subsea robotics and OPG. So if we see a longer season where there are more boats on the water, more IMR work, that seasonal activity kind of extending out really strong through the third quarter and even bleeding into the fourth quarter, you could see the high end of the garden. the guidance coming from both the subsea robotics business and OPG. So, yeah, that's goodness that bleeds into both those businesses.

Got it. And my follow-up, you touched on this a bit in Q&A already, but if I heard you correctly, you added two ISRIS systems in Q2, and I'm just curious how conversations with customers are progressing around some of these new technologies like ISRIS and Freedom and Liberty vehicles. And it sounds like you can do these retrofits in a pretty capital-efficient manner, but just curious in what we should see moving forward in terms of market adoption of those sorts of technologies.

Yeah, and I like the way you said that because, number one, there is a retrofit component, but if I had to rank these, the ISRS demand is here now because that is really related to shallow water work that's happening in the renewables business. So it is front and center, and that's why you see us talking more and more about adding those units. The other side of it is the compatibility with the Hysteros with a lot of the support systems that we have, the overboarding system, the winch system that lowers it to the water, the control cabins, everything else. It's got a lot in common with our standard system. So we can... It's the ultimate recycling program. We can use a lot of existing hardware to put an ISRS system out, which reduces the cabin cost and increases our speed to be able to deliver. So that's good. And it's the one kind of, again, front and center. Liberty would be next. And Liberty is the resident system. Again, it's got a lot of similarities with the traditional ROV system. A little more capex intensive in the sense that it's got a battery pack and it's got a buoy that comes with it and some other things. Again, probably nearer to fruition because it's really, if you talk about technical readiness level, it is closer to the things that are already being done today. So we see the customer's confidence with that kind of technology is up front and center. and then and then freedom again offers a lot of kind of new capability and and with new capability the technical readiness is a little more challenging more things to prove more trials to run um but but the capability unlocks is is even bigger than perhaps the other two so i kind of put them there about you know timing wise proven easy stuff on them on the israel system that really makes a difference in the daily operating sort of doing things that you didn't know that you could do with the freedom on the other end, it all kind of plays together. And it gives us some encouraging signs that over time, you know, all of these things are going to be happening on their own time cycle, which kind of delivers over time in a really nice way.

Great. Thanks for the answers.

Yep. Thanks, Taylor.

You haven't heard the questions at this time.

Thank you very much. Well, since there are no more questions, I'd like to wrap up by thanking everybody for joining the call. This concludes our second quarter 2021 conference call. Have a great day.

This concludes today's conference. You may now disconnect.